Agree to disagree: Lender equity holdings, within-syndicate conflicts, and covenant design

Lenders' simultaneous equity holdings introduce conflicts of interest among members of syndicated loans. We argue that lenders address such within-syndicate conflicts with financial covenant design to improve contracting efficiency. We show that loans with higher conflicts rely less on performance-based covenants, which serve as tripwires to facilitate ex-post control transfer and require coordination among syndicate members. Instead, high-conflict loans rely more on capital-based covenants to align shareholder-creditor interest ex-ante and incentivize shareholder monitoring. Overall, these results suggest that such conflicts can reduce capital flexibility and renegotiation efficiency for the borrowers.

Automated summary

Lenders' simultaneous equity holdings introduce conflicts of interest among syndicated loan members. Financial covenant design is used to address within-syndicate conflicts and improve contracting efficiency. Loans with higher conflicts rely less on performance-based covenants and more on capital-based covenants to align shareholder-creditor interest and incentivize shareholder monitoring. These conflicts can reduce capital flexibility and renegotiation efficiency for borrowers.